Key Takeaways:
Small business hiring plans dropped to their lowest since May 2020 as record-high labor costs squeeze owners.
Small business owners cut hiring plans to the lowest since May 2020 in May, with a net 9 percent planning to add jobs — down 4 points from April — as labor costs hit a record high, the NFIB survey showed.
"Owners are feeling pressed by compensation costs, but nevertheless seem to have less difficulty hiring and retaining workers," said William Dunkelberg, chief economist at the National Federation of Independent Business.
The NFIB Small Business Employment Index fell to 100.3 from 100.4 in April, its third consecutive monthly decline and below the 2025 average of 101.2. Unfilled job openings dropped to 29 percent of owners — the lowest since May 2020 — while 14 percent cited labor costs as their single most important problem, up 5 points from April and the highest reading in the survey's history. A net 31 percent of owners raised compensation, up 1 point from the prior month.
The pullback in small business hiring — a sector that employs roughly half of US private-sector workers — comes as the broader labor market shows signs of cooling. The economy added 115,000 jobs in April, and economists expect May's nonfarm payrolls report, due Friday, to show 85,000 new positions with unemployment steady at 4.3 percent. A sustained slowdown in small business hiring could increase pressure on the Federal Reserve to consider rate cuts at upcoming meetings.
The NFIB data aligns with other indicators showing consumers pulling back. Fiserv's Small Business Index remained at 144 in May, with sales flat month over month and transactions declining 0.2 percent. Average ticket growth of 3.1 percent year over year drove the modest 0.7 percent sales increase, while transactions fell 2.4 percent — the seventh consecutive month of declining foot traffic, according to Fiserv data.
"It's still not clear how some of these structural things are going to play in and also how the conflict in Iran is going to pan out," said Cory Stahle, senior economist at the job platform Indeed, referring to the broader uncertainty facing employers.
The quality of available workers has improved from the owners' perspective — 13 percent cited labor quality as their biggest problem, down 5 points from April and the lowest since December 2016. But that relief has been offset by soaring compensation costs. The 14 percent of owners naming labor costs as their top concern marks a record in the survey's history, surpassing the previous peak set during the inflationary surge of 2022.
The last time hiring plans were this low — a net 9 percent planning to add jobs — was in May 2020, when the economy was emerging from pandemic-era lockdowns. The current reading is below the historical average of a net 11 percent, suggesting the small business sector is entering a more cautious phase.
A Two-Speed Labor Market
The divergence between labor quality and labor cost concerns points to a two-speed dynamic. Owners report less difficulty finding workers — unfilled skilled positions fell to 27 percent of owners, down 2 points — even as the price of retaining them climbs. This suggests wage competition is intensifying among businesses that are still hiring, while those pulling back face less pressure to fill roles.
The broader economic backdrop complicates the outlook. April's consumer price index rose 3.8 percent year over year, the largest increase since May 2023, as energy prices spiked after the Iran conflict. Average hourly earnings rose 3.6 percent, meaning inflation outpaced wage growth for the first time since 2023 — a dynamic that could further squeeze consumer spending and, by extension, small business revenues.
What Comes Next
The NFIB survey's forward-looking indicators offer little comfort. Plans to raise compensation in the next three months held steady at a net 18 percent, suggesting owners expect labor costs to remain elevated. With the Fed's next rate decision due in two weeks — new Chair Kevin Warsh's first — the small business data adds to the case for a pause, though OIS markets will be watching Friday's payrolls report for confirmation.
This article is for informational purposes only and does not constitute investment advice.
